Using a 4.5% discount rate, calculate the Net Present Value, Payback, Profitabil
ID: 2659533 • Letter: U
Question
Using a 4.5% discount rate, calculate the Net Present Value, Payback, Profitability Index, and IRR for each of the investment projects below (note, the inflows are for each year). Based on your calculations rank the projects and support you answer.
Project 1
Initial Invest= $490,000, Cash inflows of $100,000 for years 1-5 and $50,000 for years 6-10.
Project 2
Initial Invest= $970,000, Cash inflows of $400,000 for years 1-3, $0 for years 4-7 and $250,000 for years 8-10.
Project 3
Initial Invest= $820,000, Cash inflows of $300,000 for years 1-5, $0 for years 6-9 and $100,000 for year 10.
(Part 2)
Assuming a budget of $1,100,000 what are your recommendations for the three projects in the above problem. Explain.
Assuming a budget of $2,200,000 what are your recommendations for the above problem? Explain
Explanation / Answer
NPV is $122,739.21
The IRR is 9.92%
The PI is 612,739 / 490,000 = 1.25
Payback period: $90,000 / 100,000 = 4.9 years
Here is an online financial calculator to get the PV (or NPV by adding the initial investment as a negative cash flow on Year 0) of future cash flows; and then by trial and error you can use the same calculator to get the IRR by simply playing with the interest rate for getting the result of the NPV closest to zero.
Do the same for projects 2 and 3. As to the investment recommendations with a budget of $1,100,000 select the one project with the highest NPV. As to the investment recommendations with a budget of $2,200,000 select the two projects with the highest NPV.
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